Question

Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2018 (credit balances indicated by parentheses). Michael acquired all of Aaron’s outstanding voting stock on January 1, 2014, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Company’s stock actively traded at $35.50 per share.

Aaron Company 12/31/18 $ (478, see) 194,250 119, eee (165,250) (819, eee) (165,250) 5, (979, 250) Revenues Cost of goods sold Amortization expense Dividend income Net income Retained earnings, 1/1/18 Net income (above) Dividends declared Retained earnings, 12/31/18 Cash Receivables Inventory Investment in Aaron Company Copyrights Royalty agreements Total assets Liabilities Preferred stock Common stock Additional paid-in capital Retained earnings, 12/31/18 Total liabilities and equity Michael Company 12/31/18 $ (725, 5ee) 327,750 137,700 (5, eee) $ (265, e5e) $(1,048, eee) (265,250) 90, eee $(1,223,5e) 167, eee 402, eee 633, cee 710, eee 522, eee 999.eee $ 3,433, eee $(1,199,950) (3ee, eee) (5ee, eee) (3ee, eee) (1,223,250) $ (3,433, eee) 20,600 291, eee 342, eee 419, eee 419, eee $ 1,491,600 $ (382,350) (1ee, eee) (3e, eee) (979, 25e) $(1,491,6ee)

On the date of acquisition, Aaron reported retained earnings of $470,000 and a total book value of $600,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year remaining life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books. Aaron declared and paid dividends in the same period.

1. a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2018.

2. b. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent's individual financial statements?

Answer 1

MICHEL COMPANY AND CONSOLIDATED SUBSIDIARY consolidation worksheet for year Ending December 31, 2018 Consolidated Consolidation Entries Debit Credit Aaron Total $ (478.500) (1.204,000) Accounts Michael $(725,500) Revenues cost of goods sold 327, 750 Amortization exene 137,700 194,250 50 poo 119.000 271700 Dividend income (5000) 5,000 Net income $ (265,050) $ (165,250) $ (410.300) Retained arnings. No (Michael) 1,048,000) 0 Retained earnings, (Aaron) O (819,000) (165,250) Net income (above) (265,050) | 1 (410,300) Dividende declared 90,000 5.000 5,000 90,000 Retained eanings 12/31 $(1,223,050) $ (979,250) $ (320300) continued

Accounts Michael 1$ 167,000 consolidation Entries Aaron | Debit I credit $20,000 consolidated Total cash Receivables 402.000 291,000 Inventory 633000 342,000 o Investment in 710,000 Aaron co copyrights | 522,000 Royalty aggreement 999.000 Trade Mark o 419.000 419.000 o . Total assets $ (3,433,000) $1,491,600 Liabilities $0,109.gso) $ (382,350) Prederred stock (300,000) 0 Common stock (500.000) (100,000) Additional paid. la capital (300,000) (30,000) Retained earnings (1,223,050) (979,250) (320,300) 12/31 (above Gotal Cabilities $ (3,433 000) * (,491,600) $5,000 $5,000 $(320,300) and equity

Aaron fair value (stock exclanged at fall value) Book value of subsidiary Excess falv value over book value $470.000 3,60.000 $ 110,000 Excess assigned to specific Annual Lite accounts based on fair values (થાં A menticatio Royalq artered Trade mark $ 60,000 64 50.000 flotas $10,000 5,000 13 110000 $ 15,00 Total The parent company is apparently applying the initial value Methad only dividend Income 's recognized during the corren year and the Investment account rentalns the original $470.000 balance Aaron's retained earnings $ 490,000 Retained earnings at date of Purchase 230.000) Increase since date of Porvehall $260.000 Encess amortization expenses ($15,000x4 Year)) (60.000) for years to conversion to equity method Prict (Entry "(c) $ 200,000